Realty transactions are getting more transparent

When Sandesh Jain, a senior executive with one of India’s top construction firms, was looking to buy a house in Mumbai three years ago, he would take one of his firm’s architects with him—just to check if the carpet area of the flat was indeed what the broker and the builder claimed it was.

“It was always considerably less than what they claimed. I have come across instances when they claimed that the... super built-up was 35% but when my guys came to check, they found it to be 40% or even more!” says Jain.

Super built-up is real estate terminology for common areas such as landings and staircases that are counted as part of a flat’s area. Thus, if a flat is 1000 sq. ft, then the actual area the buyer gets would be 650-700 sq. ft. In many cases, buyers like Jain have found that the super built-up area was way above the accepted norm of 30-35%. But in the absence of any government regulations, builders were giving less living space while charging for more, with no one to ask questions.

But earlier this year, in a move that has brought some amount of transparency into residential transactions in the state, the Maharashtra state government directed that all sale-purchase agreements for residential properties must mention the actual carpet area of the flat being sold. “At least now the buyer knows what he is paying for, even if he is still paying for the common areas,” says Jain.

This is one of the several steps taken by state governments across the country to bring a semblance of transparency into a sector that has become one of the key drivers of the Indian economy.

In the last two years, not only the home-buyer but almost all the segments of the industry have seen greater levels of transparency creeping in—clarity in existing laws and new regulations, in land titles and also for companies trying to raise money through share sales.

For instance, Pune’s city administration initiated a project to computerize land records, which facilitated developers and investors as well as the individual buyer.

The stock market regulator, the Securities and Exchange Board of India (Sebi), too, moved to make land bank disclosures more transparent given the number of real estate companies lining up public issues.

Reason: the industry has matured enough to become a significant contributor to the economy. According to industry estimates real estate contributes around 7% to India’s gross domestic product.

Already individual builders’ associations are making an effort to listen to the consumers’ point of view—both Pune and Bangalore Builders Associations have started consumer redressal cells to address complaints.

That the sector is far more transparent today than it was five years ago is borne out by the real estate transparency index issued by Jones Lang Lasalle, a real estate advisory firm.

India’s rating on the index has moved up two rungs from opaque to semi-transparent since 1999, when the index was first published. The firm said in an accompanying press release while publishing this year’s index that: “India’s improvement from opaque to semi-transparent was helped by the availability of market information improved general accounting and reporting processes and substantial improvement among participants about the legal process that relate to contract enforcement and legal relief.”

Sebi’s disclosure norms for listed companies will also help to bring in more transparency into the market going forward as many real estate developers have lined up public issues, says Ambar Maheshwari, director investments at DTZ, a UK-based advisory firm.

“As more and more companies come into the capital markets and begin to follow the Sebi disclosure norms, there will be a greater degree of transparency in the sector as reporting will increase,” says Maheshwari.

Sebi’s norms for listed companies include quarterly and annual balance sheet disclosures to the stock exchanges and regular scrutiny by the regulator.

With the Reserve Bank of India choking off bank credit to real estate companies, most have little option but to explore the private equity or public issue route, which in turn will result in greater transparency in the sector, says Vicki Oberoi, MD, Oberoi Constructions.

Oberoi himself took the private equity route and got $152 million funding from Morgan Stanley Real Estate Fund (MSREF).

With the real estate industry growing at 33% CAGR (compounded annual growth rate), the number of companies likely to hit the primary market is expected to grow. (This year alone seven more real estate companies are expected to come out with their public issues, according to data provided by Prithivi Haldea, managing director Prime Database.)

And some are already preparing for the event by putting in place systems such as enterprise resource planning, software that integrates all of a company’s operations. Pune’s Marvel Developers is one such company. Says Vishwajit Jhavar, managing director of Marvel Developers, a first generation real estate entrepreneur: “We entered this business about five years ago, when it was still largely a mom and pop business run by people with land holdings.

But in the last few years, the landscape has changed so much that professionals like us are now regarded more highly than traditional firms.” The reason is obvious—Marvel which plans to enter the capital markets sometime next year is already putting in place a enterprise resource planning system which will make put all the customer and company data online. “Investors and buyers can access all the information they want upfront,” says Jhavar.

This is exactly what private equity funds look for says Oberoi. “When we began looking for private equity, we knew that our balance sheets and all the financials would be checked thoroughly. But if you have big plans and want to acquire national or international footprints that is the way to go as they bring the expertise and connections,” says Oberoi.

Private equity investors usually look for a seat on the board, which gives the fund a say in the company’s day-to- day running. Says Mark Thornton of 3i, the London-based private equity fund, which has invested in several projects through Indiareit, “Generally, once we are on the board of a company we get to know what is happening within the company and can ensure that our investors’ money is safe.”

MSREF’s Anand Madduri has a place on the Oberoi Constructions board.

Says Mridul Upreti, head of investments at Jones Lang Lasalle: “The difference between Indian real estate and (that in) a transparent market like the US or the UK is that an investor can identify the risk before investing in a transparent market. In a non-transparent market the investor does not know what the risk factors are—he is investing blind.”

Proposed Real Estate Investment Trusts (REIT) and other real estate derivative products in the pipeline will also make the industry more transparent, says Maheshwari. “Once assets are listed and traded, their rental incomes and valuations based on these will become clearer.”

Maheshwari adds that one of the biggest contributions to the rise in transparency have come from foreign companies setting up offices in India .

“They usually refuse to pay any cash components on their transactions since they have strong disclosure norms in their home countries, and the scope for under the table deals is much less,’’ says Maheswari. “As a result most of the deals in commercial realty are through cheque payments compared to a few years ago when much of the payment was in cash.”